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Supermarket dairy case a deep, dark place

First it was the milk wars.

First it was the milk wars. Now it is the spin war around the milk wars. Woolworths used the forum of the Royal Agricultural Show to launch a deal to buy milk directly from a bunch of dairy farmers in what it described as an Australian supermarket first.

Coles is miffed. It says it has had a direct buying relationship with several dairy co-op producers for a couple of years including Warrnambool Cheese and Butter, Bega and Norco.

Thus the Manning Valley farmers who have lodged a collective bargaining agreement to deal with Woolworths, which is now before the Australian Competition and Consumer Commission for approval shouldn't have to worry that it won't get a tick.

It undoubtedly works for some dairy suppliers to engage directly with the supermarket. One in the industry likened it to taking out a fixed-rate loan - it may not be the best result but it contains certainty on terms that the supplier can deal with.

The Woolworths deal doesn't cut out the middleman because the milk still has to be processed. But, rather than processors buying the product, processing it and then selling it to the supermarkets, the processors are just paid a toll along the way - and it would be a skinny one.

The direct dealing that Coles is already engaged in with dairy suppliers is a little different because these co-operatives already have processing plants.

Indeed, both Coles and Woolworths have entered direct relationships with all sorts of primary producers and we will probably see the trend continue.

Meanwhile the results delivered on Wednesday by one of the big dairy processors, the New Zealand-based Fonterra, demonstrated just how badly this part of the industry is faring.

Fonterra's Australian business "had to contend with a very competitive retail environment", which was in part responsible for the division's profit falling a massive 32 per cent.

The company said the supermarket push into private labels was increasing competition and rationalisation of shelf space had been a feature in Australian supermarkets.

As a result, Fonterra said, there were winners and losers among its various butter, cheese and yoghurt brands.

The message is that Fonterra is now in the process of rationalising its Australian manufacturing to reduce the number of brands it offers.

It is a move that the three main Australian processors need to emulate.

The supermarkets argue that the dairy rationalisation has more to do with their having acquired expensive, inefficient plants built at a time when markets were regulated.

That may contain some truth, but the growth of private-label dairy products has exacerbated the problem.

All these concerns form part of the ACCC's investigations into the market power of supermarkets.

Of the questions raised by suppliers to this columnist is how, as house brand retailers, the supermarkets can manage to retain Chinese walls with their suppliers who are also competitors.

Detractors say suppliers need to furnish the supermarkets with detailed information about product innovation and pricing in regular meetings.

This could open the way for supermarkets to formulate their own private-label product strategies ,which could undermine their suppliers.

It's akin to the telco industry in which Telstra owns the wholesale network that supplies infrastructure to retailers with which it competes.

After years of howls of protest from the smaller telcos the government ultimately decided to build a new wholesale network to solve this structural problem.

The trouble for the ACCC is that these matters are hard to police and even harder to prove.

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